TREASURIES-U.S. yields climb on expectations of Fed tightening

BY Reuters | ECONOMIC | 01/10/22 10:38 AM EST

* 10-year yield up for seventh straight day

* 2-year yield hits highest since March 2020

* Investors eye inflation data later this week

By Chuck Mikolajczak

NEW YORK, Jan 10 (Reuters) - The benchmark U.S. 10-year Treasury yield rose to its highest level in nearly two years on Monday, as investors continue to anticipate the Federal Reserve will begin its tightening policy with an interest rate hike as soon as March.

Friday's payrolls report, which missed expectations on the headline number but showed sturdier underlying data that was viewed as unlikely to derail the likelihood of the central bank hiking rates and winding down its bond holdings sooner than many had initially thought.

Goldman Sachs now expects the Fed to raise interest rates four times this year, matching the view of analysts at J.P. Morgan and Deutsche Bank.

A tight labor market and rising inflation have fueled expectations the central bank will become more aggressive in raising rates and tapering its balance sheet. Investors will get a look at inflation date late this week in the form of consumer and producer prices indexes.

"The 10-year yield is still pretty well contained when you look at the forward curve, notwithstanding the moves we have seen in the bond market over the last week or so, that we see the 10-year yield getting much above 2% even a couple of years out," said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.

"What it is suggesting is, sure, tighten all you want but this economy really can't withstand substantially higher rates and continue to grow."

The yield on 10-year Treasury notes was up 3.6 basis points to 1.805% after climbing to 1.808%, its highest since Jan 21, 2020.

The 10-year yield has risen for seven straight days, its longest streak of gains since an 8-day run in April 2018.

Richmond Fed President Thomas Barkin said on Monday it is conceivable the central bank could hike in March, according to the Wall Street Journal. On Friday, San Francisco Federal Reserve Bank President Mary Daly said she could see the Fed shrinking its balance sheets after raising rates once or twice.

The yield on the 30-year Treasury bond was up 2.6 basis points to 2.142%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 90.7 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 2.6 basis points at 0.896% after climbing to 0.91%, its highest since March 3, 2020.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.819%, after closing at 2814% on Friday.

The 10-year TIPS breakeven rate was last at 2.518%, indicating the market sees inflation averaging 2.5% a year for the next decade.

The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.437%. (Reporting by Chuck Mikolajczak Editing by Nick Zieminski )

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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